Working Paper

Firm Dynamics and SOE Transformation During China's Economic Reform

Abstract: We study China’s state-owned enterprises (SOE) reform with a focus on the corporatization of SOEs. We first empirically document that small SOEs are more likely to exit or become privatized, whereas big SOEs are more likely to be corporatized while remaining under state ownership. We then build a heterogeneous-firm model featuring financial frictions, endogenous entry and exit, and optimal firm-type choices. Our calibrated model suggests that in the long run, the SOE reform increases the aggregate output by facilitating resource reallocation to the private sector. Along the transition, the corporatization option leads to higher aggregate output than the privatization-only policy by giving a higher financing capacity to more productive incumbent SOEs.

Keywords: firm dynamics; economic reform; Chinese economy;

JEL Classification: E23; E44; O16; O41; O43;

https://doi.org/10.26509/frbc-wp-202124

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2021-10-19

Number: 21-24

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• Working Paper Revision: Firm Dynamics and SOE Transformation During China’s Economic Reform